Health Insurance Amendment (Medicare Safety-nets) Bill 2005

Bills Digest no. 017 2005–06

Health Insurance Amendment (Medicare Safety-nets) Bill
2005

WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.

Passage History

Purpose

To amend the Health Insurance Act
1973 to increase the annual thresholds above which benefits
under the extended Medicare Safety Net are payable. The thresholds
will increase from $306.90 to $500 for concession card holders and
other low income families, and from $716.10 to $1000 for all other
families and individuals from 1 January 2006.

The extended Medicare Safety Net was
introduced in March 2004, as part of a series of changes to
Medicare under the auspices of the government s Medicare Plus
package. The Safety Net is designed to assist patients with high,
cumulative out-of-pocket medical costs: it provides reimbursement
for out-of-pocket costs incurred for medical treatment provided
outside a hospital, once certain thresholds are
reached.(1)

Under the Medicare Safety Net, patients are
reimbursed for 80 per cent of their out-of-pocket costs (that is,
the cost over and above the relevant Medicare rebate) for medical
treatment received in a non-hospital setting,(2) once a
certain threshold is reached in a calendar year. This includes
out-of-pocket costs for things like GP and specialist
consultations, and diagnostic tests such as X-rays and pathology
exams. In other words, once an individual or family has incurred
out-of-pocket costs for non-hospital medical services which add up
to the threshold amount in a calendar year, the Safety Net covers
80 per cent of any further out-of-pocket costs for the rest of that
calendar year.

The current thresholds are $306.90 for
Commonwealth concession card holders and families in receipt of (or
eligible for) Family Tax Benefit (A), and $716.10 for all other
individuals and families (the thresholds are indexed
annually).(3)

Since its introduction in March 2004, the
Safety Net has been very popular with patients (not surprisingly
since it provides patients with protection against the cumulation
of high out-of-pocket medical costs). Figures released by Health
Minister last year showed that 650 000 people qualified for
the Safety Net between March and July 2004.(4) The
Government estimates the Safety Net will benefit 1.5 million
Australians in 2006 , even after the increased thresholds come into
effect.(5)

Notwithstanding its popularity with patients,
the Medicare Safety Net has been the most contentious of the
Medicare Plus reforms introduced in March 2004. Much of the
controversy over the Safety Net has centred around its cost, which
has been considerably higher than originally anticipated. A
timeline of the blow-out in the cost of the Safety Net is shown in
Table 1.

When the Safety Net was first proposed in
November 2003, the Government intended setting the threshold levels
at $500 for concession card holders and other low income earners,
and $1000 for other individuals and families (the new threshold
levels proposed by this Bill). However, as part of its negotiations
with independent senators to secure the passage of the Medicare
Safety Net legislation through the Senate in March 2004, the
government agreed to lower the annual thresholds it had originally
proposed to $300 for concession card holders and low income
families, and $700 for all other individuals and families,
respectively. The anticipated cost of the Safety Net over the four
years to 2006-07 as a result of the lower threshold levels was $440
million.(6)

However, in the first six months after it was
introduced, more people qualified for the Medicare Safety Net than
the Government had anticipated: it was initially estimated that
around 450 000 individuals and families would benefit from the
Safety Net in any one year, yet almost 650 000 people
qualified for the Safety Net in the first few months of its
operation alone.(7) As a result, figures released by the
Treasury during the federal election campaign in September 2004
showed that the cost of the Medicare Safety Net would be more than
double the approximately $120 million originally forecast for the
2004 05 financial year.(8) Subsequently, the total cost
of the Safety Net over the out-years would have blown out to over
$1 billion more than double the original projections.(9)
Nonetheless, during the election campaign the Health Minister, Mr
Abbott, famously gave a rock-solid, iron-clad guarantee that the
thresholds would be maintained at their existing
levels.(10)

In April 2005, the Government provided figures
showing a further increase in projected Safety Net expenditure: the
Prime Minister told ABC radio that if the current threshold levels
were maintained, the cost of the Safety Net would be $1.65 billion
over the next four years (to 30 June 2009) almost four times the
original projections.(11)

The Safety Net as originally proposed (with
$500 and $1000 thresholds) was expected to cost $266.3
million in the first four years of its operation (2003 04
to 2006 07)(12)

March 2004

The revised four-year cost of Safety Net (as a
result of reduced thresholds negotiated with independent senators)
is estimated at $440 million (for the years 2004
05 to 2007 08)(13)

September 2004

Treasury figures show the cost of the Safety
Net as $142 million higher than the approximately $120
million originally forecast for the 2004 05 financial
year.(14) Subsequently, the cost over four years (2004
05 to 2007 08) was be estimated to have blown out to approximately
$1.05 billion(15)

April 2005

The government confirms that the cost of the
Safety Net if the current threshold levels were maintained would be
$1.4 billion over the period to 30 June 2008, and
$1.65 billion to 30 June 2009. Accordingly, the
government announced that it will move to increase the Safety Net
thresholds(16)

As a result of the higher than expected cost
of the Medicare Safety Net in its first year of operation, the
government announced in April 2005 that it would increase the
Medicare Safety Net threshold levels to the levels originally
proposed ($500 and $1000 respectively) to maintain [the Safety Net
s] sustainability .(17)

The threshold changes are expected to generate
savings of just under $500 million over the next four years, as
shown in Table 2.

(The amount of $50 million for 2005 06
reflects that the changed threshold amounts will take effect half
way through the financial year.)

As a result of the anticipated savings from
the increased thresholds, the total cost of the Safety Net over the
next four years should be approximately $1.15 billion (though the
Government has not released an official revision, disaggregated by
year, of the total cost of the Safety Net since March 2004).

According to information provided by the
Department of Health and Ageing during Senate Estimates hearings in
June, if the current thresholds were maintained, in 2006 2.5
million people would qualify for the Safety Net. Under the
increased threshold levels, approximately 1.5 million people are
expected to qualify for the Safety Net. Therefore, 1 million less
people are expected to qualify for the Safety Net as a result of
the increased thresholds.(19)

The Department has not released any figures
regarding the breakdown of how many people will be affected by the
increased thresholds at each of the threshold
levels.(20)

By making it more difficult to qualify for the
Safety Net, the increases to the Safety Net thresholds proposed by
this Bill will certainly help to rein in expenditure on the Safety
Net in the short term. According to the Government s modelling, the
changes will reduce projected expenditure on the Safety Net over
the next four years by almost one-third, though the total cost of
the Safety Net will still be more than double that projected in
March 2004 when the Safety Net was introduced (see above). However,
the structure of the Medicare Safety Net means that the effects of
the increases to the Safety Net thresholds on total expenditure on
the scheme in the medium and longer terms are more uncertain.

As outlined above, under the Medicare Safety
Net, 80 per cent of out-of-pocket (non-hospital) medical costs are
reimbursed once a patient or her/his family reaches the relevant
threshold in a calendar year. Therefore, like other demand-driven
programs (such as Medicare rebates and drug subsidies under the
PBS), once the parameters of the Safety Net s operation are set,
expenditure on the Safety Net effectively becomes open-ended.
However, unlike other demand-driven programs, benefits
under the Safety Net are not tied to any price controls or price
signals: that is, unlike regular Medicare benefits which are tied
to the amount of the Medicare schedule fee (a fee set by the
government in consultation with the medical profession), Safety Net
benefits are entirely contingent on the amount charged by the
practitioner.

In the case of specialists services or
expensive diagnostic tests, medical practitioners fees often bear
little relationship to the Medicare schedule fee. Proponents of the
Safety Net argue that this is precisely its strength: that is,
because Medicare schedule fees have not kept pace with the cost of
providing these kinds of services, it is important that a scheme
like the Safety Net exists to protect patients, particularly those
with chronic conditions, from an accumulation of high out-of-pocket
costs which are associated with these kinds of
services.(22) However, because Safety Net benefits are
effectively unregulated, from a sustainability point of view this
is a potential problem because Safety Net benefits are uncapped
(both in percentage and aggregate terms). With such an uncapped
structure, once a patient has reached the relevant threshold, 80
per cent of the patient s out-of-pocket costs are reimbursed by the
Safety Net, even if charges exceed the norm, for example if a GP
were to charge $100 for a standard consultation, or an obstetrician
$10 000 for the management of a pregnancy. It is this aspect
of the Safety Net that is, the fact that benefits are both uncapped
and unregulated that has been most criticised by opponents of the
Safety Net scheme, such as the Labor opposition and several
commentators in the health sector.(23)

Of course, market forces should usually
prevent doctors from charging excessively high prices. The point is
that, in a scheme where the level of benefit is not tied to any
price signal, and therefore effectively unregulated, it is
potentially extremely difficult to control the overall cost of the
scheme. This is arguably what led to the higher-than-anticipated
cost of the Safety Net following its introduction last year.
Accordingly, if it is the case that the blow out in the cost of the
Safety Net was the result of these structural
factors, adjusting the levels of the Safety Net thresholds
may just amount to a tinkering at the edges which will not address
sustainability issues in the long term.

For example, the Australian Medical
Association (AMA), a staunch supporter of the Medicare Safety Net,
has been strongly critical of the government s decision to increase
the Safety Net thresholds, describing the decision as a great
disappointment , because the young families out there that are
struggling struggling to meet medical costs, and who are relying on
that safety net to deliver security and affordability, now feel as
though they ve been cheated . Former AMA President Bill Glasson
argued that the existing Safety Net thresholds should have been
left in place for at least 12 to 18 months longer to determine
whether or not there were any inflationary pressures on the system
before the Safety Net was changed.(24)

Catholic Health Australia (CHA), which
represents Catholic health care providers, has described the
threshold increases as a cruel hit on families. According to CHA s
chief executive Francis Sullivan, the threshold increases are the
equivalent of a $200-a-year health tax and for most people it will
be difficult for them to achieve the Safety Net, so it just drains
household budgets without compensation .(25) Likewise,
the president of the Australian Council of Social Service, Andrew
McCallum, has said that the threshold changes are really going to
hurt those who are sick and poor .(26)

Even commentators who were lukewarm on the
Safety Net at the time of its introduction because of its potential
to increase health inflation, such as the Australian Consumers
Association (ACA), have been critical of threshold increases.
Nicola Ballenden, the ACA s health spokesperson, has said that the
threshold changes will put the safety net out of reach of more
consumers, you will need to be wealthier to benefit from it, and it
will do nothing to stop [health] inflation .(27)

Tim Woodruff, from the Doctors Reform Society,
who criticised the Safety Net when it was introduced for
effectively providing a blank cheque to [specialists to] increase
co-payments ,(28) has argued that the threshold changes
demonstrate the Safety Net s structural flaws. According to Dr
Woodruff, in the eight months between July 2004 and March 2005,
Medicare benefits rose by 15 per cent, at least partly as a result
of the inflationary pressures created by the Safety
Net.(29) Accordingly, Dr Woodruff argues that as a
result of the threshold increases the main beneficiaries of the
Safety Net will be the rich that is, those who can most afford to
pay the high specialists bills which will make them most likely to
qualify for the Safety Net in the first place.(30)

Labor opposed the introduction of the Safety
Net last year, arguing that it would have an inflationary effect on
health costs,(31) and said last year that it would
abolish the Safety Net if elected to government.(32)
Labor has been strongly critical of the Government s decision to
increase the Medicare Safety Net thresholds, though its criticism
has focused on the fact that the decision to increase the
thresholds represents a broken election promise as mentioned above,
during the election campaign Health Minister Tony Abbott gave a
guarantee that the Safety Net thresholds would not be changed if
the Government was re-elected.(33)

The Australian Democrats, who, contrary to
many media reports opposed the Safety Net in its current form when
it was introduced in March last year, have described the threshold
changes as having ignored the need for real reform in health and
instead shifted costs onto patients .(34) According to
Democrats Leader and health spokesperson Lyn Allison, the Howard
Government s Medicare Safety Nets were unsustainable from the
outset and now the sick will pay for the Government s monumental
backflip .(35)

Similarly, Greens Senator Kerry Nettle has
said that the increase in the Safety Net thresholds is evidence of
a deeply flawed policy : The government was warned before it
implemented the policy that it was inflationary No amount of
fiddling with it will overcome its inherent flaws
.(36)

The Bill will make the following changes to
the Health Insurance Act 1973:

items 1 and 3 change the nominal threshold
amount for concessional individuals and families, and families in
receipt of Family Tax Benefit (A), from $300 to $500

item 2 changes the nominal threshold amount for
all other individuals and families from $500 to $1000

item 4 changes the commencement
date for annual indexation for both threshold levels to 1 January
2007 (since the new threshold amounts will take effect from 1
January 2006, these amounts do not need to be indexed in 2006.
Accordingly, item 4 resets the indexation arrangements to commence
on 1 January 2007 one year after the new nominal thresholds come
into effect), and

item 5 applies the new threshold amounts to
medical expenses incurred on or after 1 January 2006. The current
threshold levels continue to apply for medical expenses incurred in
2005 (or earlier).

In the short term, the increases to the
Medicare Safety Net thresholds contained in this Bill will have the
desired effect of stemming expenditure on the Safety Net by making
it more difficult for patients to qualify for Safety Net
benefits.

However, the effectiveness of the threshold
increases in containing Safety Net expenditure in the medium to
longer terms is uncertain. Arguably, the reason expenditure on the
Safety Net has blown out to the extent that it has since March 2004
is not a result of the threshold levels. Rather, it is a result of
the Safety Net s structure, whereby Safety Net benefits are not
tied to any price signals that is, they are uncapped and
effectively unregulated. This being the case, increasing the
thresholds will limit the cost of the Safety Net in the short term
but controlling aggregate expenditure in the medium-longer term may
still prove to be problematic.

In the enabling legislation (the Health Insurance Act
1973), the term extended Medicare Safety Net is used because
there was a Safety Net already in existence when the Safety Net
that is the subject of this Bill (the Safety Net introduced as part
of Medicare Plus) came into existence. Under the existing Medicare
Safety Net, Medicare benefits increased from 85 per cent (the usual
level of rebate) to 100 per cent of the Medicare Schedule fee (the
recommended fee set out in the Medicare Benefits Schedule), once
patients reached certain thresholds for accumulated out-of-pocket
expenses. The difference between the old (existing) and new
(extended) Safety Nets is that the old Safety Net provided
additional benefits only up to the level of the Schedule fee,
whereas the new or extended Safety Net provides reimbursement for
80 per cent of the total out-of-pocket cost. This can be
substantially higher than the Schedule fee, as there is no
obligation for doctors to charge the Schedule fee. The old or
existing Safety Net is still in place: patients can claim benefits
under both Safety Nets. In this Bills Digest, the terms Medicare
Safety Net and Safety Net refer to the new or extended Medicare
Safety Net.

Patients can take out private health insurance to insure
themselves for the cost of in-hospital treatment as private
patients (hospital treatment is provided to public patients free of
charge).

This estimate is derived by multiplying $262 million (the total
anticipated cost of the Safety Net in 2004 05 as a result of the
revised expenditure estimates released by Treasury) by four (the
number of years in the out-year period.

Tony Abbott, Minister for Health and Ageing, interviewed in
Doctoring the figures: rorting of Medicare by health professionals
, Four Corners, ABC TV, 6 September 2004.

Angela Pratt
9 August 2005
Bills Digest Service
Information and Research Services

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